Hello everyone, and thank you for your patience. Welcome to the Scandi Standard Interim Report for the Third Quarter of 2021. My name is Bethany, and I'll be coordinating this call for you today. If you would like to register to ask a question at Q&A, you may do so by pressing star followed by one on your telephone keypad. I will now hand the call over to Otto Drakenberg, the CEO of Scandi Standard. Otto, over to you.
Thank you very much. Good morning, everyone, and welcome to this presentation of Scandi Standard's Q3 2021 results. As said previously, I'm Otto Drakenberg. I'm the Acting CEO of Scandi Standard, and with me today, I have Julia Lagerqvist, the company's CFO. Next slide, please. During the quarter, Scandi Standard's business continued to face several challenges which have had a negative impact on our results. Our net sales were SEK 2.6 billion in line with previous year, while our operating income amounted to SEK 30 million compared to SEK 116 million the same period last year. The result is in line with what we recently communicated in our trading updates.
This negative development is driven by multiple factors, and to address them, we have, during the quarter, started a decisive implementation of a group-wide improvement program with the first priority on recovery in the short term and the next priority on positioning this business for the longer term. The board of directors has also announced the appointment of a new CEO, Jonas Tunestål, who, with a long-standing background in the industry, will take office during the first half of 2022. I and the Chairman of Scandi Standard, Johan Bygge, will ensure a seamless transition over to Jonas. You may rest assured that as an Interim CEO, it is my mission to continue to address the current challenges and implement the measures needed to bring this business back towards normalized earnings and with full force. Next slide, please.
Scandi Standard has a history of strong top-line growth with a compound growth rate of 7% and stable EBIT margins around 4% over the last five years. Our profitability is currently deviating materially from these historic earnings, and this is driven by four main factors, which I will elaborate on in the following slides. These factors are the lead time in passing through historically high increases in feed prices, the low price realization in the export markets, the major losses in our Ready-to-Cook business in Denmark, and fourthly, the impact of previously announced deviations in production and quality. I will also elaborate on the measures we're taking to address these factors in the subsequent part of the presentation. Next slide, please. The first factor affecting our performance is the cost inflation and the lead time in passing on these increases to the end customer.
Our current pricing model has, during normal circumstances, served us well, but in times of rapid price increases, this leads to delay in pricing, which has a severe impact on our profitability. Feed prices have increased by 16% compared to the last year and has a large impact as it accounts for 23% of the cost base of the company. Other input factors such as packaging, energy, and transportation costs have also increased substantially. The delay in passing over price increases currently means that the price increases that we're experiencing in quarter four are not compensated for yet, and that we therefore can expect further deterioration of earnings in the fourth quarter. We see a considerable short-term exposure to this price inflation. As part of the group-wide improvement program, there is an overriding priority across the group to obtain the necessary price increases towards our customers.
It's comforting then that we have already seen some positive confirmations which will have effect from the start of 2022, and we remain confident that we will be able to gradually pass through known cost increases during next year. Even though we are exposed to this price slight inflation in the short term, there are good arguments for poultry being better positioned in comparison to other proteins. As you can see in the lower right-hand table on this slide, poultry has a much shorter production cycle, which means that the category is hit by cost increases at an earlier stage. While on the other hand, adaptation to changes is faster compared to proteins such as pork and beef.
Further, poultry has a substantially lower price point compared to, for example, pork, beef and pork, which leads to positive substitution effect in an inflationary environment where customers focus more on affordable food. This means that we're confident that we'll be able to revert to a more normalized situation over time. Next slide, please. The second factor hitting us is the export prices. While we predominantly produce chicken for the domestic markets, we also have a dependence on the export market for managing excess volumes domestically, and more importantly, to ensure profitable utilization of the whole bird. The export channel represents 7% of our total sales in Ready-to-Cook.
As you can see in the graph here, there's been a drop of 15% in export prices over the last two years due to global oversupply as a result of COVID-19 impact on the food service channel and specific regulatory export restrictions regarding bird flu preventing export sales several months after an outbreak. This has had a severe effect on Scandi Standard. During the last 12 months, the bird flu alone has had an estimated negative impact on EBIT of SEK 67 million, of which SEK 19 million only in the third quarter. We will therefore see a continued need to reduce excess volumes in our business. As a leading poultry supplier, we're also engaged in the dialogue with the relevant authorities to establish less rigid import restrictions to lower the commercial effects of potential local outbreaks in the future. Next slide, please.
The third factor affecting us is our loss-making Danish Ready-to-Cook business. Denmark has always been a tough market with sharp competition, low prices, and high exposure to the volatile export markets. To address the low profitability in Denmark, the previous Danish Ready-to-Cook management team introduced a new slow-growing bird strategy to increase differentiation and thereby increase price points in the marketplace. However, the execution of this strategy failed. Customer contracts did not sufficiently cover the production volumes, nor the required price points to cover the incremental costs of the slow-growing birds. Large losses has since then been incurred. Long-term fixed volume contracts with farmers have then prevented us from rapidly adjusting bird intake to mitigate this unfavorable situation. How are we then addressing this structural problem in Denmark?
Let me first say that I firmly believe in the concept of differentiation in commoditized markets such as Denmark. We have made now major changes to management locally in Denmark. We have adjusted the slow-growing bird strategy and are aligning it with major retail clients. We are reducing the product assortment and therefore also complexity. We have increased contractual flexibility with our suppliers. We also initiated structural cost reduction measures such as significant staff reductions. We are determined to cut the losses in the short term in Denmark and creating the right conditions for returning to profitability for our RTC business in Denmark. Next slide, please. The fourth factor affecting us has been the deviations in quality and production processes. Most of you probably are well aware of, we experienced unacceptable deviations in our facilities in Valla in Sweden.
We initiated a group-wide investigation emphasizing that any deviation should be acted upon immediately as of now. Today, I'm very happy to confirm that the outstanding items in Valla have now been closed, as confirmed by the authorities. The facility in Sweden was impacted by the heat wave in July, and in Ireland, operations were affected by the outbreak of COVID-19, which we informed about in the quarter two report. The group-wide investigation has now been integrated in the group-wide improvement program as part of our normal routines. As part of that program, we have made structural interventions in Sweden and Ireland, where we decided to temporarily reduce the intake of birds by 8%-10% in both countries to achieve desired operational capability and stability.
The reduced volume has a short-term negative impact on the operating income, but will at the same time enable a more rapid implementation of desired operational improvements. This also entails a downsizing of staff in Sweden, primarily through temporary employments not being renewed and a redeployment of manning in Ireland. I firmly believe that these measures are necessary to consolidate our position as a leading sustainable poultry producer in the markets where we operate. Compliance with internal policies and zero tolerance with deviations is a must in order to meet the demand for tasty, healthy, and climate-smart poultry products. These four areas that I just gone through constitute the main drivers of the lackluster result in the third quarter, and are addressed by our group-wide improvement program.
Together with the Scandi Standard team and the Board of Directors, I'm confident this will tackle the current challenges and support value creation towards the company's long-term potential. Now, let's look at the segments in some more detail. Next slide, please. Looking at an overview of the segment contribution, you can see that the lion's share of our current challenges are tied to Ready-to-Cook, representing three-quarters of our net sales. We continue to see a good development for the Ready-to-Eat business, driven by the recent food service recovery and continued strong demand in retail for these products. The segment Other includes ingredients and overhead costs, and this quarter also includes the final purchase payment relating to our Finnish business. Next slide, please.
Taking a closer look at Ready-to-Cook, top line was stable at an unsatisfactory margin of 0.4% during the third quarter. EBIT amounted to SEK 7 million compared to SEK 105 million in the same quarter last year, mainly due to the factors mentioned previously in this presentation. During the period, we also noted a negative development regarding Lost Time Injuries. This was driven by the higher share of extra personnel during the outbreak of COVID-19 in Ireland, in combination with an increased focus on reporting. Work safety now is an area where we're addressing all outstanding items forcefully going forward. Another key indicator for us is critical consumer complaints, and it is very satisfying to see that the complaints have been during this period at zero level in line with our targets.
This also confirms that the production challenges we have experienced have not impacted product safety. Next slide, please. Looking at our Ready- to- Eat business, we delivered a good performance in the quarter with sales increasing by 11%. The margin was significantly above the last 12 months and improved from the previous quarter. The injury rate here was slightly higher versus previous year, but the complaints, the critical consumer complaints, was at zero in the quarter. Next slide, please. Behind the growth in Ready- to- Eat is the rebound in the food service channel as expected when COVID-19 restrictions are being lifted. We could also see a continued strong performance in retail, which is a sign of lasting demand increase for our Ready- to- Eat products in the retail channel, following the shift in consumer behavior after COVID-19.
Ready-to-Eat saw strong performance in all three markets, and to meet this increased demand, we plan to increase the capacity in our existing Danish RTE plant through optimized staffing. With that, I would like to hand over to Julia for a review of the financials. Julia?
Thank you, Otto. With that, we turn to page 13 and the overall group P&L. As you're seeing, we've had a strong decline in both EBITDA and EBIT in the quarter. The finance net for the quarter was minus SEK 20 million and included a negative forex effect. This leads us to an income for the period at a low SEK 4 million compared to SEK 78 million last year, and an earnings per share at a disappointing SEK 0.04 per share. Moving to page 14 and looking at the returns, we see that obviously, these challenging results have led to a large drop in return, both on Return on Capital Employed and Return on Equity. Where the Return on Capital Employed is this quarter at 5.8% versus 8.8% in the previous year.
However, the Equity Ratio is still stable and remains close to 29%. Moving to the next Slide 15, we see continued low level of working capital, positively affected by the postponed tax payments related to COVID-19 State aid. This leads to a working capital to sales ratio to still be below zero. Our target ratio, adjusted for financing, is to be around 6%. We are currently a bit above this. Looking then at page 16 and the cash flow, as can be deduced, the reduced EBITDA has a strong effect on the operating cash flow. However, to meet the low results, we have as cash preservation measures restricted the CapEx spend in the quarter and have a low CapEx spend at SEK 31 million . The operating cash flow for the quarter was at SEK 112 million .
All in all, the net interest and debt decreased in the quarter and has been stable over the last year. Looking at page 17 and looking at our main sustainability KPIs, this is something that is at the core of our business. As Otto mentioned, Lost Time Injuries have increased in the last two quarters. This is now a clear focus area with targeted actions. At the same time, you can see that the CO2 emissions and also the use of antibiotics and the feed conversion is moving in the right direction. It is very encouraging to see. Finally for me, some words on the cash flow guidance. As you said, in order to create financial flexibility, the capital expenditures is now restricted to SEK 300 million roughly for the year compared to previous guidance of SEK 400 million.
The interest level is estimated to be at 3%-3.5%, and the blended effective tax rate to stay around 20%. We still have our continued liability in the shape of the Manor Farm acquisition, but the final settlement will be paid now in Q4. Related to this, we will release a provision of SEK 26 million. In light of the temporary reduced earnings, we have taken, as you said, significant cash preservation measures. As a part of that, the board has also resolved not to propose a second dividend for 2021. The overall policy for dividend remains the same to be at 60% of net earnings over time. With that, I hand back to you, Otto.
Thank you, Julia. To conclude, Scandi Standard has been facing multiple challenges during the third quarter. To meet these challenges, an extensive group-wide improvement program is under implementation, and it primarily focuses on obtaining the required price increases in the marketplace, implementing measures to turn around the Danish operations, and further strengthening the production and quality processes. It's important to state that some of these measures will have short-term negative impact on results, and that the external challenges we have seen now will not go away overnight. Hence, we expect that the quarter four results will deteriorate further compared to the quarter three level. I'm determined to continue to drive progress against our prioritized targets. I'm also encouraged by the fact that I have a very strong commitment from the full Scandi Standard team and my board across all markets.
The headwind impacting our business in the short term does not counter the strong prospects and earnings potential of Scandi Standard. We have a very solid market position in all the five countries where we operate, and the products meeting the taste, nutrition, sustainable, and resource efficiency required by the consumers in the future. I'm therefore confident that the actions we're taking will deliver a gradual recovery to normalized levels during 2022 and position us well for the profitable growth in the longer term. With that, I will open up for questions and answers.
If you would like to register to ask a question, please press star followed by one on your telephone keypad now. We have a question from Daniel Schmidt at Danske Bank. Daniel, your line is open.
Yes. Good morning, Otto and Julia. I hope you can hear me. A couple of questions from me then. Just starting with Ready- to- Cook in Denmark, which of course has been a big drag with heavy losses throughout this year. Could you just give us what the numbers were last year and the year before that, so we just know what this used to make?
Hi Daniel, we have not shared those numbers. We have only shared for this year. That is not official information, unfortunately.
Okay. Could you say anything about sort of this entity? Did it make money in 2019? What is reasonable? Why should we get back to break even now if it hasn't made money before? That's what I'm trying to ask.
Still, as I said, we don't give out the historical figures, but we have made money historically.
When we conclude in the statements that I have shared with you that we're in the short term going to cut losses and in longer term going to bring Denmark into profitability, we rest on the assumption and the assessment of our strength of the plans compared to the assessment of the market. Just relying on history is not the best way to predict the future in a business such as ours.
When you talk about a gradual recovery to normalized earnings levels in 2022, that of course includes the plan for Denmark. What are you actually mean by normalized level? Would you care to sort of give some more color on that? What is a normalized level for you guys?
Normalized level for us is to be around the 4% that we have been historically. If you look at the graph that was shared.
Looking at the EBIT margin, basically.
Yeah.
Yeah.
You could not confuse normalized earnings with the long-term desired level where we want to bring Scandi Standard. We need to get to the desired levels in steps, and the first step is to get Scandi Standard back to what we refer to as normalized levels. With a further development of our group-wide improvement program that will be taken over by my successor, the ambition then is, of course, to take the company over time up to a desired level, which then is beyond, up above and beyond the normalized level that we refer to.
Yeah. When you say gradual, is it your sort of ambition to have this at a run rate of 4% during 2022 or is that gonna be hopefully the end result of your plan for 2022?
I do not want to comment on that one in this call. I will have to get back at a later point in time.
All right. Okay, good. Then moving on to the other pieces here. You talked about the export price development as of late, and it's, I think you said, showed in the graph that it was down 15%. It bounced up a little bit in Q3 versus Q2. Any comments on the latest development moving into Q4?
On the export prices, you mean?
Oh, sorry. It bounced actually from Q1 to Q2 and then down a little bit in Q3 versus Q2. Yeah. Has that been further deterioration or is it stable or is it moving, even up?
Our assessment is that it is flattish.
Yeah. Okay. All right. When you talk about the group costs, you mentioned that the changes have been made and there's a saving of around SEK 15 million that will be realized in 2022 versus 2021, if I got it right. Then you say that further savings are planned, basically. Could you give us any indication of the magnitude?
Yes. The two items you mentioned are separate from each other. Previously in quarter three, we announced reorganization which had savings effect annually of SEK 15 million. Today, I alluded to significant staff reduction in operations. That is another cost reduction measure. I will give you a magnitude. I will not give it a monetary magnitude, but we're looking at or implementing more or less as we speak now. It's being communicated this week to all involved in the magnitude of slightly south of 200 people in the group.
All right. Is that across the group or is that mostly the Danish operation?
That's affecting two countries predominantly. In one country, we are doing so-called remanning. We are bringing personnel over from certain shifts to optimize the operations. It's basically addressing or stems from two countries.
Is that difficult, do you think? I assume it's always difficult, but is it extra difficult? Because you said something about bringing up production in Ready-to-Eat and sort of meeting that demand.
I think the person who says it's easy to do staffing changes is not honest. Of course, we are talking about people. In this circumstance, it is easier than you would say a normal downsizing, because we are basically and mostly talking about hourly wage personnel. That means that we are not renewing contracts for people, which is of course a lighter, somewhat easier way of reducing personnel than if you actually have to fire. The other advantage from a company point of view is of course that there are no significant severance payments included.
Okay. Not even mentionable in that term when you talk about severance payments?
Correct.
Okay. You're just terminating contracts, basically?
That is what we're doing this time around. The group-wide improvement program is designed not as a one-off and a one-shot game. We are putting in place a number of processes in a number of areas. I alluded to one previously in the communication around how we're going to ensure going forward that we have zero tolerance on compliance deviations, but we also have a process to constantly be reviewing efficiencies in our operation. That means that we're going to review as we are coming into full compliance in all our countries. We're also going to look very closely in the coming period and coming year into efficiencies in our plants.
I will not elaborate further on that now, but I want everyone to know that we are going to pursue all possible efficiencies. That can, of course, lead to further manning adjustments. Dan, I will close on your comment when it comes to- Our plant that produces RTE products in Denmark. That production increase is predominantly being helped by optimizing staffing and staffing schedules to allow for that production increase.
Okay. Apparently a lot can be done just by scheduling in order to get more output. But the fact that you're bringing in less birds in order to be able to handle this, and that you're sort of taking out contracts corresponding to 200 people, does that automatically still mean the top line will be coming down?
Well, the reduced line speed is done to large extent to ensure that we speed up the compliance measures and making sure that all our standards, internal and external, are being adhered to rigorously. Temporary line speed reduction have then been seen as one important measure. Now, as we become more and more of a meaner and leaner organization, we shall, as it's needed, be able to increase throughput in the future, as it's needed, because we're going to work in a more effective way.
Yeah. That's more for 2022?
Correct.
Yeah. I don't know if there's any others on the line, so maybe I should ask a final question, a more technical question. Julia, you mentioned that there will be a final settlement when it comes to Manor Farm in Q4. At the same time, if I didn't get it wrong, you also said that there will be a release of provisions of SEK 26 million. What's gonna be the net there?
We haven't disclosed that in this report, but basically what you're seeing that we had reserved a higher amount than where we finally landed, and that's why you have this positive effect of SEK 26 million.
The net effect will be less than. Again, it's gonna be a one-off, so it doesn't matter. Okay. I'll step back. Thanks.
Thank you, Daniel.
The next question comes from Christian Nordby at Kepler. Christian, your line is open.
Yeah. I have a question regarding the bird flu situation. You write that it was detected in Denmark in November 2021. What's the situation in the various countries?
The situation regarding bird flu is that there has been a case detected in Denmark, and now yesterday we heard of a case detected in Norway. This was late yesterday afternoon. The authorities work in such a way that they try to contain the situation regionally. If you look at the Norwegian example, for instance, the affected flock is in the proximity of suppliers to our operations. That means that the affected population has been taken care of by the authorities, and that's the same case as the case found in Denmark. It's still too early to see all the consequences that this will have. There are one in Denmark, one in Norway. We are assessing and monitoring the situation.
Of course, bird flu is not new, so it's something that the authorities and the breeders are used to. They also have very tough protocols on how to act, not only to prevent, but also in the case that it do appear, how they shall act then. We are confident that the authorities and the breeders are doing what they have to do, and we are monitoring the situation closely, of course.
Thank you. Given that you have had bird flu for a while now, I assume we shouldn't extrapolate any further decrease in export prices, or do you see that as a potential consequence as well?
I think it's too early to say. We are monitoring the situation. I refer to two cases which are almost happening and have happened, sort of, in real time, so it's too early to say.
All right. Thank you.
Thank you.
Another reminder to press star followed by one on your telephone keypad. We have a question from Helena Wande at DI. Helena, your line's open.
Hi. I just have a few short questions. You're talking about the high prices on intake, energy and transport, and that you will have to raise prices towards customers. How will you be able to do that? I mean, if you go to the grocery store now you see, like, I mean, chicken is all constantly on sale.
Well, built into our model since ages ago is the fact that any price increase from our suppliers shall be ultimately pushed through to our customers. Obviously, that's not unique for poultry. I would say that it's more or less the same for all fast-moving consumer goods categories. If you look at the track record of Scandi Standard, we have been good at that, good at passing through the input prices off to the customers and onwards then to the consumers. That's the latter is obviously not our choice. If we look at the current situation, you could say that as you go into grocery store, you would find poultry being more affordable if you look at cost per protein unit.
In this particular situation where we have such steep price inflation that is hitting most suppliers of fast-moving consumer goods, my assessment is that not only will we be able or are we able to push through, and through negotiations of course, our cost increases further to customers, but also that in relation to other sources that the consumer could choose from in the store, we will gradually come out better in that price value equation in this very particular situation we're experiencing.
Mm-hmm. You were naming lots of challenges at least. Will the changes, the program you've initiated now, be enough or do you think we can expect more?
Well, I think you should always expect more from a company such as Scandi Standard. To answer your question more specifically, the currently identified and aligned with the board group-wide improvement program is sufficient to bring the company back to what we referred to in some questions ago, the normalized earnings, bringing Scandi Standard back to the levels where we were before 2021. However, as we progress with implementing the quite tough measures in our group-wide improvement program, as we gain traction in the various areas commercially and operationally, we will of course further adapt and strengthen the group-wide improvement program.
The reason I say that is this company has so much potential and so much not yet realized potential, so the program will live on and will be strengthened to the extent it takes us to the desired level. I will not tell you what the desired level is. For in terms of profitability and returns, but it shall absolutely be above and beyond what is referred to as the normalized earnings. To get us to the first step, this group-wide improvement program is enough.
Okay. Last question. You're talking about the normalized earnings 2022. Do you see it in the first half of the year or second half, or can you specify quarter when you will think you will be back on track?
We will gradually be back or get back on track, and that's as specific as I want to be today.
Okay. Thank you.
We have no further questions registered at this time, so I'll hand it back to Otto and Julia for any closing remarks.
Well, my only closing remark is to thank all of you who called in, and I look forward to the next quarterly call with even more people calling in. This is not the only highlight of working as a CEO, but I think this is a very important moment where my surface area with the leadership team and the board meets our shareholders and investors. I get a lot of energy out of this. I appreciate your questions, and you can rest assured we are doing everything in our power to get Scandi Standard back to normalized levels and then onwards, and we feel very charged to do that. Thank you very much for being with us today, and have a great Friday.